Is Cosonic Intelligent Technologies (SZSE:300793) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cosonic Intelligent Technologies Co., Ltd. (SZSE:300793) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cosonic Intelligent Technologies

How Much Debt Does Cosonic Intelligent Technologies Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Cosonic Intelligent Technologies had debt of CN¥1.13b, up from CN¥398.4m in one year. But on the other hand it also has CN¥1.91b in cash, leading to a CN¥786.9m net cash position.

A Look At Cosonic Intelligent Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Cosonic Intelligent Technologies had liabilities of CN¥782.8m due within 12 months and liabilities of CN¥966.9m due beyond that. On the other hand, it had cash of CN¥1.91b and CN¥451.7m worth of receivables due within a year. So it can boast CN¥615.9m more liquid assets than total liabilities.

This surplus suggests that Cosonic Intelligent Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cosonic Intelligent Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Cosonic Intelligent Technologies if management cannot prevent a repeat of the 54% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cosonic Intelligent Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cosonic Intelligent Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Cosonic Intelligent Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cosonic Intelligent Technologies has CN¥786.9m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Cosonic Intelligent Technologies's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Cosonic Intelligent Technologies , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com